Russia, bowing to budget pressures, revives oil firm sell-off

SOCHI, Russia (Reuters) - Russia said on Friday that it was resuming the shelved privatisation of oil firm Bashneft, in a sign of how anxious the Kremlin is to raise money to fill holes in the budget left by the economic slump.

The Bashneft privatisation, the most significant sell-off of Russian state assets in years, had been postponed indefinitely in August.

Sources close to the government and the bidding process said at the time the postponement was ordered by the Kremlin to staunch infighting among rival clans over who would be the eventual buyer.

But in a U-turn, Deputy Prime Minister Igor Shuvalov said on Friday steps to resume the privatisation would be taken immediately.

He said that Rosneft - the state oil giant whose ambition to acquire Bashneft triggered the infighting - would be free to take part. A spokesman for Rosneft said the company would be lodging a bid.

Shuvalov also said the government would proceed immediately with the sale of a minority stake in Rosneft itself, an acquisition of potential interest to international oil majors who covet a share in Russia's massive crude reserves.

"Money is needed urgently," a source in the government said, when asked what brought about the government's U-turn on its privatisation plans.

A second source in the government said: "The sale of Bashneft to Rosneft is a done deal."

BUDGET HOLES

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Russia is in its second year of economic recession, mainly because of the fall in world prices for crude oil, its principal export. It expects only very moderate growth next year,

The government has struggled to find funds to cover its growing budget deficit. The finance ministry said on Friday the deficit may hit between 3.5 percent and 3.7 percent of gross domestic product this year, compared to a 3 percent estimate a few months ago.

Russia's sovereign wealth funds are depleting fast, and its ability to raise debt on international capital markets is limited by financial sanctions imposed on Moscow over its role in the conflict in Ukraine.

The government has little scope to cut spending. That could alienate ordinary people whose support President Vladimir Putin will need if, as expected, he seeks re-election in a presidential election in 18 months.

"After further study of the Rosneft and Bashneft privatisation issues by the government, and after a presentation to the president, it was decided to resume the preparations for selling a controlling stake in Bashneft and immediately proceed to prepare for selling a 19.5 percent stake in Rosneft," Shuvalov said.

Speaking to reporters at a business forum in the Black Sea resort of Sochi, he said the government had reconsidered its position after seeing investor appetite for the two stakes and learning what the potential bidders planned to do if they won.

"According to the assurances that we have received from investment consultants, we hope to receive above 1 trillion roubles ($15.92 billion) from these deals by the end of the current year," Shuvalov said.

"The money from the Rosneft privatisation will be counted as budget revenue, and the revenue from the sale of Bashneft (will go on) covering the federal budget deficit," he said.

On the Bashneft sale, Shuvalov said: "Rosneft will not be prevented from participating."

PUTIN'S CHOICE

Two years into an economic crisis made worse by the Kremlin's political stand-off with the West, Putin faces a difficult choice.

He needs to find ways to plug the holes in the budget and put money into the pocket-books of ordinary Russians who have seen their incomes drop in real terms. But the prescriptions for achieving that goal could also unleash conflict within his own entourage, potentially destabilising his rule.

The plan to sell a 50.8 stake in Bashneft had attracted interest from Rosneft, a company headed by Putin's long-standing associate Igor Sechin, and Lukoil, Russia's biggest privately-owned oil company run by billionaire Vagit Alekperov.

The interest from Rosneft provoked a storm of protests from pro-market groups within the Kremlin elite who did not see the benefit of one state-owned company acquiring another, according to the sources close to the government and the privatisation process.

But in an interview earlier this month, Putin signalled he did not see a problem with Rosneft bidding.

"It looks like Rosneft convinced the government that it is the most suitable suitor to buy Bashneft," said Sergei Vakhrameyev, analyst with GL Asset Management.

Shuvalov said there has been substantial interest in both the Bashneft and Rosneft sell-offs.

He said Bashneft has attracted interest primarily from Russian investors.

The planned sale of the 19.5 percent stake in Rosneft, by contrast, was garnering interest mainly from foreign investors, Shuvalov said.

(This version of the story corrects paragraph 23 to remove erroneous reference to Rosneft)